Navigating the Startup Investment Terrain of 2024
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Chapter 1: Current State of Startup Investments
The financial climate for startups is notably challenging. In particular, early-stage and pre-revenue companies faced significant hurdles in securing funding during 2023. The global venture capital (VC) investment volume has plummeted by nearly 70% compared to 2021, revealing two primary factors for this decline.
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Section 1.1: Locked-up Capital
The global economic downturn began in early 2022, influenced by factors such as the Russia-Ukraine conflict, rising energy prices, and a general slowdown in economic growth. These elements contributed to rampant inflation, prompting financial markets worldwide to respond with substantial interest rate increases. The era of readily available funds has ended, requiring more careful investment strategies. This shift has particularly affected large companies, reducing their ability to invest.
Startups, especially those outside the United States, largely depend on mergers and acquisitions (M&As) for their exits—approximately 80% of these exits involve acquisitions by larger firms. The investment freeze that affected various sectors led to a notable decline in M&As starting in the second quarter of 2022. Consequently, VC firms are now managing portfolios filled with highly valued companies that are generating little to no revenue, making profitable exits difficult. This situation has crowded VC portfolios and limited new investment opportunities, with funds tied up in investments from 2022 and earlier.
Section 1.2: The Cost of Capital
In addition to the locked-up capital issue, the challenge for venture capital firms in acquiring new funding has become more pronounced. The end of the "cheap money" era means that securing funds for high-risk ventures is now a more daunting task. Previously, borrowing for investments was simpler and cheaper. In the current economic environment, however, this approach requires more caution and strategic foresight.
Now, let’s address the crucial question: What are venture capitalists and investors on the lookout for? How can you attract their investment?
Chapter 2: What Investors Desire in 2024
The shifting financial landscape is influencing the types of startups that VCs are inclined to support. There is a clear trend toward businesses with more immediate profitability pathways, in contrast to those promising long-term, uncertain returns. This evolution in investment strategy may lead to transformative changes in the startup ecosystem, potentially curbing innovation and high-risk experimentation. Overall, this results in a more conservative investment approach, with VCs becoming increasingly selective and cautious in their funding decisions. The startup landscape can be categorized into three types:
- Startup A: Generates revenue right from the start and remains profitable from day one. Example: SurveyMonkey
- Startup B: Requires significant investment to gain traction and will gradually start generating revenue. Example: Airbnb
- Startup C: Needs substantial upfront investment (e.g., for developing deep tech products) but can be highly profitable once launched. Example: OpenAI
In 2024, it is anticipated that the majority of investment capital will flow toward startups like Startup A, which are already profitable. The emphasis for these investments will shift from product development to scaling existing successes. A smaller portion of investment will target Startup C, accounting for 10–20% of VC portfolios, focusing on creating the “next big thing” through technology. To attract such investment, a solid business case and a clear path to profitability are essential.
For startups categorized as “Startup B”—the kind that has thrived in the past two decades—securing funding in 2024 might be particularly challenging. Many now-prominent companies, such as Airbnb and Uber, fit within this category and would have faced significant difficulties in obtaining funding during 2023 and 2024.
Therefore, my advice for your venture in 2024 is to maintain a lean operation for as long as possible and consider delaying discussions with investors until the latter half of the year, if feasible.
Thanks for your attention, and stay ahead of the trends. Mats.
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